Carbon-emissions trading

A green future

The creation of a new exchange

MARKET forces and the environment are not always in harmony, but a new venture, announced on September 7th, may help lessen the discord. The European Climate Exchange (ECX), formed in an agreement between the Chicago Climate Exchange (CCX) and London's International Petroleum Exchange (IPE), will offer European companies a place to trade emissions credits for greenhouse gases.

Regulation has spurred the creation of the ECX. Next January, the European Union will put into effect new rules designed to curb carbon-dioxide emissions, which contribute to global warming. Companies in the EU's 25 member states will be allowed to emit a certain amount. If they go over, they can buy credits from companies that have stayed within their limits. The ECX plans to offer trading in emissions-credit futures by the end of this year, with cash products to follow soon afterwards.

In anticipation of this scheme, forward trading has already begun, though not on the ECX. Nine European brokerage houses already facilitate over-the-counter trades. Evolution Markets, one such firm, estimates that the volume traded has risen from 25,000 tonnes of carbon dioxide in January to 600,000 in July. In addition, companies trade directly with one another. To put this trade into context, Germany alone produces at least 800m tonnes a year. “It's only now that you're beginning to see real liquidity in the market,” says Stian Reklev of Point Carbon, a Norwegian market-analysis firm.

America, where the CCX opened for business last year, seems further behind. Despite the exchange's list of illustrious corporate members (including Ford, IBM and Dow Corning), trading is light for a country that emits perhaps a quarter of the world's greenhouse gases. There are lots of sellers but far fewer buyers, so a tonne of carbon dioxide goes for about $1, compared with €8.50 (around $10) in Europe.

The reason is that the American market has not had Europe's regulatory shove: the United States, unlike Europe, did not sign the Kyoto agreement on climate change and is not forcing companies to limit emissions. Still, the CCX seems to be betting that one day this will change. Nine north-eastern states, for example, are mulling a “cap-and-trade” programme similar to Europe's. The CCX also says that it will begin trading in allowances for sulphur-dioxide emissions, which cause acid rain.

For now, though, the CCX is pinning high hopes on its new European subsidiary. Volume on the ECX and elsewhere is likely to soar as the scheme begins. By 2007, Mr Reklev estimates, allowances worth up to €10 billion will be traded, compared with €65m this year. Bumps may lie ahead, though. For one thing, there will be plenty of novice participants: although energy companies have long experience of hedging on the IPE and other exchanges, other companies may have trouble adjusting to futures trading.

The ECX will also face competition. Brokers such as Evolution Markets are already in the market and intend to stand their ground. Other exchanges are also planning to enter the fray. The European Energy Exchange, an electricity specialist based in Leipzig, says it will start a cash market for carbon-dioxide emissions in a few months. In addition, Nord Pool, the Nordic power exchange, and Austria's energy exchange are making similar plans. Whether there is room for everyone remains to be seen.